Albemarle Corporation Form 10-Q Summary
Business Context and Reporting Period
Unaudited results for the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods. Albemarle operates specialty chemicals businesses in Lithium and Advanced Materials, Bromine Specialties, and Refining Solutions. The former Performance Chemicals segment was separated into Lithium and Advanced Materials and Bromine Specialties. Chemetall Surface Treatment was classified as discontinued operations following the June 2016 agreement to sell it to BASF SE.
Key Financial Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net sales | $654.0 million | $693.2 million | $2.0 billion | $2.1 billion |
| Gross profit / margin | $239.0 million / 36.5% | $219.0 million / 31.6% | $729.6 million / 36.8% | $622.5 million / 29.6% |
| Operating profit / margin | $124.9 million / 19.1% | $86.4 million / 12.5% | $491.2 million / 24.8% | $192.1 million / 9.1% |
| Net income attributable to Albemarle | $128.2 million | $65.4 million | $41.6 million | $160.7 million |
| Diluted EPS from continuing operations | $0.93 | $0.48 | $3.53 | $1.27 |
| Adjusted EBITDA | $188.3 million | $180.7 million | $570.8 million | $581.5 million |
| Cash flow from operations | $199.9 million | $183.7 million | $452.4 million | $316.9 million |
Q3 continuing-operations net income was $114.5 million, compared with $59.8 million in the prior-year quarter. Nine-month continuing-operations net income was $428.3 million, compared with $158.3 million. The nine-month net loss from discontinued operations was $357.8 million, primarily reflecting a $411.3 million non-cash tax charge related to the planned Chemetall sale.
- Segment net sales in Q3 increased 7% to $625.4 million excluding divested businesses. Lithium and Advanced Materials sales rose 15%, Refining Solutions rose 3%, and Bromine Specialties rose 2%.
- Q3 adjusted EBITDA increased 4%; Lithium and Advanced Materials increased 18% and Refining Solutions increased 19%, while Bromine Specialties declined 12%.
- Cash and cash equivalents were $233.6 million at September 30, 2016, compared with $213.7 million at December 31, 2015.
- Total debt was $3.45 billion, including $400.9 million of commercial paper and $3.05 billion of long-term debt excluding current maturities.
- Capital expenditures were $141.3 million for the first nine months, including $15.5 million related to discontinued operations. Continuing-operations capital expenditures for 2016 were expected to approximate $185 million.
- The quarterly dividend was increased 5% to $0.305 per share. Nine-month dividends declared were $0.915 per share.
Material Changes Versus the Prior Comparable Period
- Reported sales declined 6% in both the quarter and nine-month period, mainly because the metal sulfides and minerals-based flame retardants and specialty chemicals businesses were sold in the first quarter of 2016. Excluding those divestitures, Q3 sales increased $34.1 million and nine-month sales increased $71.1 million.
- Margins improved substantially due to higher volumes, favorable pricing, lower variable and fixed costs, and the absence of 2015 Rockwood purchase-accounting inventory markup charges.
- Acquisition and integration costs declined to $6.7 million in Q3 and $44.3 million for nine months, from $36.5 million and $117.2 million, respectively, in 2015.
- Interest expense declined 17% in Q3 and 25% for nine months due to lower debt and refinancing completed in October 2015.
- Operating cash flow increased $135.5 million for the first nine months, despite a $79.7 million working-capital outflow.
- Net income attributable to Albemarle declined 74% for nine months because the discontinued-operations tax charge more than offset stronger continuing operations and gains on business sales.
Guidance, Outlook, Risks and Unusual Items
- Management expected the Chemetall Surface Treatment sale to close in the fourth quarter of 2016 for approximately $3.2 billion in cash, subject to adjustments and regulatory and other customary closing conditions. Proceeds were intended for significant debt reduction, growth investment, and shareholder returns.
- Management expected continued strong Lithium growth, led by battery-grade applications and price improvement. PCS faced weakness in curatives and a customer bankruptcy, expected to reduce 2016 continuing-operations pretax income and adjusted EBITDA by approximately $15 million.
- Bromine Specialties was expected to have weaker second-half sales and profitability because of lower offshore-drilling demand, flame-retardant order timing, seasonality, and inventory rebalancing.
- Refining Solutions was expected to benefit from heavy-oil upgrading demand and improved clean-fuels technology mix, although low oil prices could delay catalyst changeouts.
- Management expected a 2016 global effective tax rate of approximately 15.9%, subject to geographic earnings mix and tax-law changes.
- The company stated that it was on track to exceed its initial Rockwood synergy expectations and focused on deleveraging, cost reduction, productivity, and portfolio optimization.
- Principal risks include global economic weakness, product demand and pricing volatility, raw-material and energy costs, foreign exchange, low oil prices, regulatory and environmental matters, litigation, cybersecurity, chemical manufacturing hazards, pension obligations, acquisition and divestiture execution, and access to financing.
- Recorded environmental liabilities were $33.6 million; management estimated potential additional environmental remediation costs of up to approximately $16 million before tax.
- Off-balance-sheet arrangements, including bank guarantees and letters of credit, totaled approximately $60.0 million. Management reported compliance with debt covenants.
Investor Verification Checklist
- Verify the timing, final proceeds, adjustments, tax consequences, and use of proceeds from the Chemetall Surface Treatment sale.
- Reconcile reported earnings with continuing-operations earnings by separately evaluating the $411.3 million non-cash tax charge and other discontinued-operations items.
- Assess debt reduction, commercial-paper refinancing needs, leverage covenant compliance, and the effect of variable interest rates.
- Evaluate whether Lithium pricing and volumes, Bromine demand, and Refining Solutions catalyst activity support management’s outlook.
- Review adjusted EBITDA reconciliations and distinguish recurring operating performance from acquisition costs, divestiture gains, inventory-markup effects, foreign-exchange items, and other unusual adjustments.
- Monitor environmental, litigation, pension, tax, foreign-currency, and regulatory contingencies, including the uncertain-tax-position liability of $99.1 million.